If you are under about 45 years of age, the odds are that you agree with one statement made by Dick Cheney: that “Reagan proved that deficits don’t matter.”
As I mention from time to time, I am a fossil. I remember the “guns and butter” inflation of the late 1960s (Google is your friend) and the stagflationary 1970s.
Here is a graph of the interest yield on the 10 year bond from 1981 through 2013:
In an era of declining interest rates, deficits don’t matter — or at least very little.
Initial jobless claims: the single most positive aspect of the entire economy
I haven’t been bothering to comment on initial jobless claims reports lately, for the simple fact that every week it’s the same story: they’re good! In fact, the initial jobless claims reports are probably the single most positive aspect of the entire economic expansion. For all intents and purposes, nobody is being laid off!
For initial jobless claims even to be giving a “caution signal” about the economy, I would need the YoY comparison to increase:
Note that this frequently but not always happens several years in advance of any downturn. By contrast, current numbers are running on the order of 5% less than last year.
One dismissal that it occasionally heard is that the number is bogus because there are fewer “covered employees,” i.e., employees entitled to make a claim for unemployment benefits, in this expansion than previously.
No, Matt Yglesias, Trump is *not* “probably gonna be re-elected”
While I generally agree with the political and social observations of Matt Yglesias and Ezra Klein, their takes that involve the economy frequently drive me crazy.
So it was this morning when I encountered these two tweets from Yglesias:
This is just incredibly shallow analysis and, well, wrong!
Presidential and midterm elections are completely different beasts. Midterms are decided by partisan turnout — people who strongly agree or disagree with the policies that have been enacted as the President’s agenda. Presidential elections are primarily (although certainly not exclusively) driven by the strength of the economy.
Four biographies for President’s Day
In the past several years, I have read four biographies of overlooked or more controversial Presidents. On this President’s Day, I thought I would briefly discuss each in order of how well I thought they covered their topic.
I. “The Man Who Saved the Union: Ulysses Grant in War and Peace,” by H.W. Brands.
This is one of two recent biographies that have comprehensively rehabilitated Grant, who previously was denigrated as a corrupt drunkard who somehow managed to blunder into winning the Civil War. But when he died in 1885, he was lionized in both the North and South. HIs pallbearers included his Union partner William Tecumseh Sherman and Confederate General Joseph Johnston. Tens of thousands marched in the procession. Grant’s tomb is a huge monument along the Hudson River in New York City.
Brands shows that while Grant was an incompetent businessman, who probably was cashiered from the army for drunkenness in the 1850s, he was the right man in the right place at the right time in 1861. For Grant had been a quartermaster during the Mexican War, and became a master of logistics. If Lee was the master tactician, then along with Sherman, Grant was the better strategist, starving the Confederate army of industrial supplies and food, all the while relentlessly pushing forward (As an aside, James Lee McDonough’s “William Tecumseh Sherman” is also a very good recent biography). When Lee hoped for a Lincoln defeat in 1864, Grant ensured it didn’t happen by organizing the first massive absentee balloting, wherein state officials registered and collected ballots from his union armies. His military history of the Civil War, completed four days before his death, is still regarded as a classic and taught at military academies.
Why I’m worried about the decline in real wages
This is a follow-up to my post yesterday concerning the decline in real average and aggregate wages. Why should the data from just one month cause me to warn that “This is Bad?”
To show you, let’s decompose the data into CPI and nominal aggregate wages, shown in the below two graphs, the first of which covers the inflationary era of the 1960s and 1970s, and the second covers the disinflationary era since:
In the year prior to at least 5 (arguably 6) of the last 7 recessions, BOTH nominal aggregate wage growth was decelerating (1980 and arguably 1969 being the exceptions) and consumer inflation was increasing (1980 and arguably 2007 being the exceptions). The 1981 recession was caused by the Fed very aggressively raising rates, and in the other two instances the pattern held, but with much less of a lead.
This is bad: real wages *declined* in January; may be rolling over
Consumer prices rose +0.5% in January. That in itself isn’t bad news, as they rose an equal +0.5% one year ago, so the YoY inflation rate remains at +2.1% (so if 2% really is a target rather than a ceiling, it should not give the Fed any cause for alarm).
But that much vaunted wage hike in the January jobs report has entirely disappeared, and not just for non-managerial workers, but for the average of all workers including managers. In fact in January real wages declined.
And the trend is a little worrying.
To begin with, real wages declined -0.3% for ordinary workers, and they are now down -0.8% from their July peak:
On a YoY basis, real wages are only up +0.3%:
Interest rates: no shift in the economic weather yet
I wanted to make two comments about what has been happening recently with interest rates, a short term look and a long term look.
Today let’s discuss the short term.
Since September, long term Treasury interest rates have risen from roughly 2.1% to 2.8%. The two year Treasury yield has risen from roughly 1.3% to 2.1% — which means that for the first time in years, the 2 year Treasury is giving you more in interest than the dividend yield from holding the S&P 500. So, not only will interest rates presumably slow the economy, in terms of income they are now a *relative* bargain compared with holding a wide index of stocks.
Now, I don’t pretend to know where interest rates will go from here over the short term. Whether long rates rise over 3% or fall back under 2.5%, I don’t know. But let’s assume that over the short term they stay roughly where they are now.
An upward spike in interest rates has happened twice in this expansion. Most recently, rates spiked from under 1.5% in mid-2016 (thank you Brexit!) to 2.6% following the US presidential election (blue in the graph below). Here’s what happened with housing permits (red) and real GDP (green) in the year following that spike:
Permits stalled for most of 2017 before turning up, while GDP also paused before continuing to advance.
Fraying at the edges? *relative* underemployment increases
This is a post I’ve been meaning to put up all week (after all, this week was going to be very slow on data and news, right?).
As the expansion gets more and more mature, the *relative* performance of certain measures of improvement become more interesting. One of those is the comparison between U3 unemployment, and the broader U6 underemployment measure.
While we only have about 25 years of data, so caution is warranted, generally speaking, during that time as the expansion has improved, an increasing number of the more marginally employable find jobs. As a result, U6 declines faster than U3. Later on, as the expansion begins to wane, U6 underemployment has weakened first:
Another way of looking at this is to subtract the U3 unemployment figure from that of the broader U6 measure:
One reason not to get excited about the last week’s stock market swoon is that it isn’t being confirmed by any other short term leading indicators. Most significantly, jobless claims.
The 4 week moving average of new jobless claims has fallen below 225,000. This is yet another 40 year record low. In fact, with the exception of six weeks in the early 1970s, it’s a new 50 year low.
And adjusted for population growth, it is a new all-time low.
As a practical matter, virtually nobody is getting laid off. This is not an economy that is about to roll over.
This is a post aimed at the generally Progressive audience of this blog who followed us over from way back in our days at Daily Kos, rather than the financially sophisticated audience who have picked us up since (but of course everybody is welcome to read and appreciate!).
Anyway, at times like this over 10 years ago Bonddad used to write posts like “A comment about the markets” for the DK audience, explaining the “significance” of the market action. So in that tradition ….
First of all, don’t base any investing decision on advice from anyone you read online — including me. If you are concerned enough, go talk to a registered financial professional. In particular, at times like this, the Doomers are going to come out of the woodwork, especially at places like Daily Kos. It got to the point that in years past, I used to use the “Pied Piper of Doom” at DK as a contrary indicator. I once even called the bottom of a market selloff similar to the present one *in real time* based on his panicky post.
That being said. here’s my take based on over 25 years of watching the markets closely, and seeing this kind of selloff maybe 20 times. Moves of 3% or more a day are based on emotion, either euphoria (less likely) or panic (more likely!), or more recently, “algorithms gone wild!” (think of the “flash crash.” That is a very bad basis on which to make a decision about your money.
Because I am a nerd, and I always show you graphs, here’s a three-pack to put this in perspective. First, here is the entire 1990s, the second half of the biggest bull market in history: